Minimum Wage Rates: The Impact on Employment Levels - Essay Example

?Minimum Wage Rates The Impact on Employment Levels The economics are best said to be in equilibrium when the market forces determine the prices, andthe quantity supplied and demanded. This means that if the factors are not influenced, then there is bound to be equilibrium in the economy in the long run. However, the governments usually do not let these market forces to work out for themselves and they influence the determining factors directly or indirectly. The governments often introduce the policies of minimum wage which acts as a floor to the price of labor employed. When the government enforces the laws of minimum wages, then the market forces are disturbed and equilibrium ceases to exist creating a gap between the demand and supply, which is of labor in this case. The disequilibrium in theory results in a rise in the supply of labor but the demand reduces as the labor is now more costly. However, the magnitude by which this disequilibrium is caused depends upon the circumstances prevailing in each economy and varies from country to country which we will see later. The diagram to the right shows the labor market curve. When the market forces were independent and not disturbed, the market was in equilibrium that is the supply and demand curve intersected at a point which is known as the equilibrium point represented as L0 with the quantity of labor and W0 as the equilibrium wage rate. However, the market forces were disturbed and the minimum wage rate was introduced with the representation of Wmin. This created disequilibrium in the economy and the supply and demand curves no longer intersect at the equilibrium point. There now is a gap between the demand and supply of labor which is equivalent to L2-L1 and this is the excess labor which is not required. Since the employment has gone down from L0 to L1, this shows that the implementation of a minimum wage policy results in a decline in unemployment in an economy. Several economists and business owner, small businesses in particular, have voiced their concerns that minimum wages will result in a rise in unemployment. The worst aspect of this rise in unemployment is the fact that the people who will be most affected are the poor people who are not too educated. When the minimum wage policy will be implemented, the costs of hiring on part of the employers will rise and they will be forced to wither cut the current staff or freeze their hiring programs. They think that the poor and uneducated people will be most affected since the policy is affecting only them. The educated or wealthy people are already employed on jobs at higher management levels and their current wages or salaries are nowhere near the minimum wages. It is the lower level staff whose wages are affected and hence the employers will be forced to take action against these employees. However, a liberal think tank with the name of Economic Policy Institute have conducted a research and it has suggested that there is little evidence to suggest that there is more or less no difference in the employment levels between states in America in some industries even though there is a difference in the minimum wage rates among the states. This suggests that the impact of an introduction of minimum wage policy is dependent upon other factors as well that is industry to industry in this case. This suggests that a minimum wage policy may not have such a significant impact as economists have previously suggested. As a matter of fact, it may even increase employment in some cases because the workers were actually being paid less than the worth of revenue and profits that they were contributing to the firm economically. The findings have gone as far as suggesting that rather than creating disequilibrium in the market as a result of minimum wages, it may even help the market to come nearer to the equilibrium level by forcing the employers to pay a fairer wage to the employees. Furthermore, the employers always have the choice of reducing the supervision, training, and recruitment costs in order to balance the rise in costs of employment. (Chapman, 2004) Despite the claims of Economic Policy Institute, the fact remains that employers will always look to minimize their costs in order to maximize their profits. Companies will always be hesitant to employ more staff if their hiring costs turn out to be higher than budgeted and therefore would freeze their hiring programs, if not firing the staff to keep their costs in check. The chief economist of the National Federation of Independent Businesses has stressed on this point by saying: "If you raise the price of anything, people take less of it. That includes labor, that's why you can't raise wages during bad times. If you raise the price of labor, and the economy is growing, maybe I'll still hire people. But not now." (Isidore, 2011) The effect of minimum wage is not limited to the number of people employed alone but also the total number of hours demanded. However, the effect on hours demanded per worker varies from case to case and is still not clear. The employers will be willing to pay the increased wages as a result of the implementation of the minimum wage laws but only if the marginal revenue of the worker is greater or equal to that of the increase in wage rates. In order to do so, the employers may opt to hire more of higher skilled labor and to get rid of the lower skilled labor. The higher skilled labor is better equipped with skills to do the same task at a much higher speed than the time taken by a lower skilled labor. Since the time consumed is much less for producing exactly the same product, the productivity increases and hence the employers do not mind to pay a higher wage since the marginal product has increased as well. The effect of the minimum wage upon the number of working hours will depend on where the employee stands in the wage distribution. If the initial wages that is wages before the introduction of policy show productivity, then it is likely that the people will remain employed but will be forced to work for less number of hours, given that their initial wages are less than the new minimum wage. (Zavodny, 2000) In a research done in the United Kingdom to analyze the impact of minimum wages on the employment level, the evidence suggested that the minimum wage rates has an insignificant effect upon the employment rate among the young as well as adult workers, both male and female. Although the research suggests that the impact on female workers is negative that is the minimum wage law does negatively affect the employment level of women, while it is positive when it comes to male employees. However, the statistics are insignificant and thus the impact is not great upon the employment level of both males and females. (Stewart, 2000) However, this impact is not prevalent in all the societies and countries. For example, the impact of minimum wage laws on employment levels is far greater in South Africa than in the United Kingdom. When examining and monitoring this effect, the findings suggested that the employment levels fell significantly in response to the introduction of minimum wage laws. This was clear by the approximate 13 percent fall in employment levels when it come to farmers in the post-law period. This somehow suggests that the impact of these laws have a significant negative impact when the labor involved is unskilled. Since most of the labor in UK is skilled and educated, the impact in UK upon the employees was insignificant while in South Africa where there is a majority of unskilled and uneducated labor, the impact is much more significant. (Bhorat, et al., 2012) The Case of Nicaragua When it comes to the discussion of the case of Nicaragua where the impact of minimum wage laws on unemployment and poverty was recorded, several dynamics have to be taken into consideration. Nicaragua is situated in Central America with its border touching the Honduras. The countries that are located in Central America are mostly very poor due to administrative and corruption issues. Even in the region of Central America, Nicaragua is considered to be the poorest country of all in the region and the second poorest country in the entire hemisphere. (Central Intelligence Agency, n.d.) This alone represents that the poverty levels have pushed the people towards illiteracy and that the people who are in the labor force, whether employed or unemployed, are unskilled and uneducated. The research paper shows the results that after the minimum wage laws were introduced by the government, the wages of the employed people increased quite a bit on average. However, this had a negative impact on the economy too as the employment level in the economy decreased. The private sector was most expressive of the issue of rising labor costs and the result of this was that the people were relieved of their duties and fired from their jobs. However, the degree of rise in unemployment was not similar in all the communities of the country. The people most affected by this minimum wage were the people whose initial wages that is the wage before the enforcement of this policy was near the minimum point. People employed in the private sector and had wages near the minimum wage rate mark were made redundant while the other people were not affected much as a result of this policy. The bigger firms are the ones with more stringent management and the managers have to ensure that they keep within their budgets while the smaller firms are usually either self-employed businesses or already employ a low number of people. This is why the larger firms were the prominent ones to fire the employed staff since they thought that this increase in the labor costs was too much for the company to take and therefore they cut their costs by firing their lower staff. Along with this, the big companies also decided to freeze their employment programs in order to keep their finances into check and to ensure that their profits do not squeeze. In contrast, the smaller ones had a much less significant impact due to the fact that most of the small businesses were self-employed businesses while the rest did not employ much staff. Therefore, the impact of minimum wage laws was less significant upon the finances and profitability of the smaller firms and this showed in the case study since the level of unemployment did not rose that much in small firms as compared to that in the large firms. (Alaniz, et al., 2011) The relationship between the minimum wages and poverty is also very dynamic and influential among the households of Nicaragua. The rise in the minimum wages meant that the employed people were now earning more and had more disposal income available for consumption which also raised their standard of living. People could now earn more money and can send their children to schools or invest this money which in turn resulted in better returns in the future and more inflow of money. The households who had more family members working were more benefitted and their transition period from a poor family to an established one reduced quickly. However, as the unemployment levels rose in the economy, people were made redundant and families preferred that if any member of the household loses its job, then it better be someone who is not the head of the family. The heads of the families had the responsibilities of feeding their respective households and therefore they were more serious in finding another job or start a business themselves. This was something not found among the non-head family members because they did not actively seek a job for a few months. This therefore shows that the introduction of minimum wage laws resulted in the rise in disposable income of households on average and that their transitional periods of improving financially were now relatively much smaller, although the unemployment levels also rose quite drastically. Works Cited Alaniz, E., Gindling, T. H. & Terrell, K., 2011. The Impact of Minimum Wages on Wages, Work and Poverty in Nicaragua. [Online] Available at: http://ftp.iza.org/dp5702.pdf Bhorat, H., Kanbur, R. & Stanwix, B., 2012. Estimating the Impact of Minimum Wages on Employment, Wages and Non-Wage Benefits: The Case of Agriculture in South Africa. [Online] Available at: http://www.dpru.uct.ac.za/sites/default/files/sites/default/files/DPRU%20WP12-149.pdf Central Intelligence Agency, n.d. Nicaragua. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/nu.html Chapman, J., 2004. Employment and the Minimum Wage—Evidence from Recent State Labor Market Trends. [Online] Available at: http://www.epi.org/publication/briefingpapers_bp150/ Isidore, C., 2011. Not getting by on minimum wage. [Online] Available at: http://money.cnn.com/2011/09/27/news/economy/minimum_wage_jobs/index.htm MFC, n.d. Minimum prices: The minimum wage. [Online] Available at: http://www.mfu.ac.th/school/econ/microeconomics/minimun%20prices.html Stewart, M. B., 2000. The Impact of the Introduction of the UK Minimum Wage on the Employment Probabilities of Low Wage Workers. [Online] Available at: http://wrap.warwick.ac.uk/1560/1/WRAP_Stewart_twerp630.pdf Zavodny, M., 2000. The effect of the minimum wage on. [Online] Available at: http://ecademy.agnesscott.edu/~mzavodny/documents/LabourEconomics_minwage_000.pdf Read More